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Participation Financing as a Solution to the Agency Problem of Perk Consumption in Small Firms

  • Hua Yu

    (University of Quebec)

Registered author(s):

    Although it has been suggested that participation financing may allow publicly traded firms to reduce the agency cost of perk consumption, the effect of this type of financing in small firms needs more discussion. The objective of the article is to analyze the small firm effects on the effectiveness of the participation financing in dealing with the agency problem of perk consumption. The participation option gives outside investors less protection against the excessive entrepreneur perk consumption when the firm’s default risk is high. By contrast, the option is more effective in firms with rapid growth or high levels of information asymmetry and therefore high monitoring costs.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1994-03-3-c-yu.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 3 (1994)
    Issue (Month): 3 (Fall)
    Pages: 215-227

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    Handle: RePEc:pep:journl:v:3:y:1994:i:3:p:215-227
    Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef

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    1. Jacques A. Schnabel, 1992. "Small Business Capital Structure Choice," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 2(1), pages 13-21 , Fall.
    2. Chua, Jess H. & Woodward, Richard S., 1993. "Splitting the firm between the entrepreneur and the venture capitalist with the help of stock options," Journal of Business Venturing, Elsevier, vol. 8(1), pages 43-58, January.
    3. Richard L. Constand & Jerome S. Osteryoung & Donald A. Nast, 1991. "Revolving Asset-Based Lending Contracts and the Resolution of Debt-Related Agency Problems," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(1), pages 15-28 , Spring.
    4. James S. Ang, 1991. "Small Business Uniqueness and the Theory of Financial Management," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(1), pages 1-13 , Spring.
    5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    6. Asquith, Paul & Mullins, David W, Jr, 1991. " Convertible Debt: Corporate Call Policy and Voluntary Conversion," Journal of Finance, American Finance Association, vol. 46(4), pages 1273-89, September.
    7. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, vol. 13(1), pages 115-136, March.
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